This week is likely to see the EU grant a longer, but more conditional, extension to Article 50 than the UK Government has requested. Back in Westminster talks continue to try to find a set of proposals that can be passed by the House of Commons. Away from the politics, most economic data has been disappointing.
Grinding to a halt. The composite UK PMI fell to just 50.6 in the first quarter. This measure of the services, manufacturing and construction sectors signals tough times for economic growth, which had already slowed to just 0.2% in the fourth quarter of 2018. Still, PMIs can be overly pessimistic in periods of heightened uncertainty; here’s hoping for a bounce.
Winter is coming. Forget green shoots; activity in the UK services sector contracted for the first time in two and a half years in March, according to the widely-watched PMI survey, which dropped to 48.9. The construction sector fared little better, with a PMI of 49.7 signalling a second month of stagnant activity. Services firms reported that the drop in work was mainly caused by businesses deferring expenditure in the face of intense political uncertainty and worries about the economic outlook. Cautious households and weak export demand compounded the slowdown.
Right, but for all the wrong reasons. A rapid acceleration propelled the UK’s manufacturing PMI to reach a 13-month high of 55.1 in March. So far, so good. Yet this astonishing momentum runs counter to manufacturers elsewhere (for evidence see Germany). And for such an interconnected sector, this disparity should sound alarm bells. Because the speedy rise is due to firms stockpiling in preparation of Brexit. So should we ever be graced with a resolution to the Brexit impasse then we should probably expect a largely equal and opposite deceleration as stockpiles are unwound.
On the turn. Last month saw the clocks go forward for British Summer Time. But private sector output, orders, exports and employment went backwards in March. That’s according to the latest Ulster Bank PMI survey for Northern Ireland. Private sector firms posted their first fall in output since July 2016, which marked the knee-jerk reaction to the EU-referendum result. New orders also dipped to a 32-month low. Meanwhile the export orders and employment fell at their fastest rates in almost six years. Manufacturing was the sole sector to record output and orders growth, though this is flattered by firms stockpiling ahead of Brexit.
Ignition failure. New car sales in Northern Ireland have started 2019 the same way as last year. While the number of new cars sold in March held up relative to a year ago, the quarterly total of 16,676 was still down 3% below the corresponding quarter in 2018. Following the 9% y/y fall in sales in Q1 2018, NI new car sales have dropped by 12% cumulatively in two years. Indeed, sales volumes in the latest period represented the weakest first-quarter reading in six years. Dealers across the water are in the same boat. England, Scotland and Wales all posted year-on-year declines with the UK posting its worst Q1 performance in five years.
At your service. Recovery from the financial crisis for UK manufacturing and services took very different trajectories. Output of manufacturing is still 2.7% below the level it reached at the beginning of 2008, with 14 out of 24 sectors remaining below pre-crisis levels. Meanwhile services output is above the pre crisis levels by 16.4%, and only 2 sectors out of 14 recorded substantial declines. Contraction during the financial crisis is only part of the story. The weight of manufacturing in the UK economy continues to decline, as in many other post-industrial economies. Services now make up about 80% of UK GDP.
Let’s hope it’s temporary. UK productivity growth flat-lined in 2018. Data for Q4, showing output per hour falling 0.1%y/y, confirmed that the very modest recovery seen in 2016 and 2017 has ground to a halt. The good news is it’s not economy-wide. Growth in the services sector has softened but it remains firmly positive, while it has slowed to a crawl in manufacturing. It’s in the non-manufacturing production sector (think oil & gas) where it’s falling.
Building. Unit labour costs, which captures the full labour costs incurred in the production of a unit of economic output, including social security and employers’ pension contributions, grew 3.1% in Q4 2018, the highest pace since 2013. It won’t have escaped the Bank of England, which closely tracks this metric in assessing inflationary pressures across the economy. A continued acceleration would support a rise in interest rates. But at the moment Brexit uncertainty has the Bank on pause. When that fog clears the Bank might feel compelled to act, or at least indicate more strongly that it stands ready to.
Rebound. US payrolls posted an impressive 196k rise in March after February’s paltry 33k increase, dispelling fears about the US labour market. Jobs strength was most evident in services last month. In contrast, manufacturing employment fell for the first time since July 2017. The unemployment rate was unchanged at 3.8% last month, close to 50yr lows. However, wage growth slipped to 3.2%yoy in March versus 3.4%yoy in February, below market expectations Sluggish pay pressures amid a tight labour market look set to reinforce the Fed’s current patient stance on monetary policy at least near-term.
Slowing. Soft US retail sales reinforce the Fed’s current neutral policy stance. Consumers pared back their spending in February with an unexpected 0.2% m/m fall, pushind down the annual rate to 2.2%, from 3.3% in January. Weakness was broad-based in February: seven out of thirteen major categories declined on the month. Notable falls were evident in furniture, food & drink, electronics and building materials. Poor weather and the recent government shutdown also contributed though the impact is uncertain. Barring a rebound in March retail sales, US growth for Q1 looks pretty modest.
US exceptionalism. The US ISM manufacturing index beat away the global blues and rebounded in March, rising 1.1 to 55.3 compared with February. Expanding demand and hiring were reflected in higher new orders (57.4) and employment index (57.5). This upbeat survey provides some welcome relief ahead of the IMF’s new global forecasts due out this week.